Town Square

Update on the U.S. Economy

My opinion was that we would know by the end of July whether Plan B was needed or the stimulus, financial sector and loan modification policies were working.

It is now the beginning of August and the outlook is a little clearer but not as clear or as positive as I had hoped for.

If the July employment numbers are a good indicator, the pace of job loss has finally slowed. But one month does not make a trend. We will know better in September and October.

The way the recovery is supposed to proceed is 1) first production turns up and GDP starts growing again. This now looks likely for this quarter or next quarter as the stimulus money is coming into the economy, exports are rising and companies will rebuild inventories to some extent. The depth of the decline in GDP makes at least a small bounce more likely.

Then 2) job losses stop and turn into small job gains. It takes GDP growth of 2-2 1/2 % to produce job gains so maybe by the end of the year we will be done with the job losses. But that is a lot of jobs still to be lost before the turnaround and it is not in the bank yet.

Finally 3) job growth is strong enough to reduce unemployment. If we are lucky this could start by late spring of 2010.

I think the wild card is housing. Banks and others are holding a lot of mortgages that could go into foreclosure. The administration's loan modification program is either slow to start or unsuccessful. Time will tell.

The recovery is fragile if the housing market does not continue to stabilize and that will take much more success in modifying existing loans including, I think, some reductions in the amount of the mortgages.

I would do a second stimulus package for all states and cities. We are reducing the impact of the federal stimulus and allowing our safety net programs to be reduced at a time of greater need because states and cities must make cuts to balance their budgets.

And many states including California are reducing our investments in education and access to higher education at exactly the time when we know it is most important for our future.

Stay tuned.

Comments (1)

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Posted by Paul Losch
a resident of Palo Alto
on Aug 9, 2009 at 8:56 amPaul Losch is a registered user.

What has me worried are the severe budget problems at the state and local government levels. It is a huge issue here in California, but there are numerous other states and local governments elsewhere in the country in similar situations, or that will be soon.

I view these institutions as "enablers" that pave the road--literally and figuratively--on which the private economic engine operates.

These governments are saddled with legacy obligations such as generous pension programs for long term and now retired employees, that are an increasing portion of their budgets, and which take money away from things that can oil the economic engine.

Foolish spending programs that were introduced in headier times are now beasts to be fed. Reagan had some pat comment about this sort of thing, I wish I could remember how it goes.

Palo Altans are willing to tax themselves to support "enablers" such as our schools, our libraries, and our infrastucture, but this place is an anomoly.

I do think we averted what could have been a major catastrophe late last year, and there are some things under way from the federal government that seem to be taking root. Much of the stimulus program funding is yet to be spent, and it will be several more months at least before we start to see more fully its impact.

One can agree or disagree with what the folks in DC are doing, but either way, if our states and local governments are in a state of financial incapacity, it is an anchor on the economy that will drag it down for years to come.